In my 18 years as The Council’s lobbyist, 2010 was the biggest legislative rollercoaster—from the highs of enacting solid insurance provisions in the Dodd-Frank regulatory overhaul to the lows of healthcare reform that gave the lie to the notion that, if you like your health insurance, you get to keep it.
Now the National Association of Insurance Commissioners is in the process of dumbing down the best accomplishment of the commercial insurance industry last year—specifically, the surplus lines reforms designed to improve the multistate non-admitted marketplace.
Commissioners rapidly came to the conclusion that all they care about is revenue, and they’ve proposed the Nonadmitted Insurance Multistate Agreement that does little to streamline the surplus lines regulatory regime and is sure to perpetuate nightmarish regulatory disputes.
It’s likely that brokers and clients will continue to be mired in countless conflicting state interpretations. This is so disappointing. But given the history of the NAIC, it’s not altogether surprising. What is surprising, though, is the speed with which regulators abandoned the pursuit of uniformity.
Every state has rules governing the placement of surplus lines: eligibility standards for insurers, premium tax allocations, “diligent search” requirements regarding the admitted market that must be exhausted before a broker can seek surplus lines coverage, and so on. When a client is located in a single jurisdiction, it’s a pretty clean system. But on a multistate transaction, which is increasingly the norm, the system is deeply inefficient.
The NRRA provisions (“Nonadmitted and Reinsurance Reform Act”) of the Dodd-Frank regulatory bill were initiated and pursued by The Council for eight (l-o-n-g) years. The premise was simple: The only rules that will apply to multistate surplus lines placements are the rules of the home state of the insured. Not only is that a streamlined approach, it’s also logical. No matter where a client’s risks may be located, it’s the single corporate treasury that is in jeopardy of loss.
The NRRA, as eventually enacted, also contained ample incentives for states to get together and form an interstate compact to govern access to the surplus lines market and to efficiently and appropriately share in revenue from premium taxes. The reason the NAIC was helpful in passing the NRRA is that the association viewed the act as the only opportunity to create the political dynamic necessary to get the interstate compact done, which has been a stated goal for decades.
The main obstacle to passing the surplus lines measure over the years was the perception that there would be winners and losers among the states, depending on whose treasury was where. Our view has always been that, with a simple system, everybody would be a winner because of fewer friction costs and an uptick in compliance. But if states want to establish a formula for sharing, the proposed “SLIMPACT” could do the job.
But, of course, states are all over the map. Some think they deserve all the tax if the company is headquartered there. Some think they’ll be winners, while others worry they’ll be losers. With the effective date of July, regulators rapidly developed myopia on taxes and walked away from any substantive conversations about how to make the allocations work or how to develop uniform regulatory criteria governing surplus lines.
More disturbing is the NAIC’s development of a multi-tiered definition of “home state.” The Nonadmitted and Reinsurance Reform Act had a perfectly good and simple definition. The states were worried that people would be able to game the definition and jurisdiction shop. So they developed a new definition to be adopted by all states who adopt the Nonadmitted Insurance Multistate Agreement. And the sates who don’t adopt it? They’ll use the definition found in the The Nonadmitted and Reinsurance Reform Act
To its credit, the National Conference of Insurance Legislators and the National Conference of State Legislators both endorsed a more comprehensive “SLIMPACT-Lite” to tackle the issues. Given relatively short legislative sessions in most states, it’s hard to see how these bills can be enacted, especially given the NAIC decision to punt on the tough issues.
NAIC commissioners have said they will continue to pursue uniformity over the long haul. Sorry, but we’ve heard that line before. When the NARAB agent/broker licensure provisions became law in 1999, states could go the path of loose reciprocity or more desirable uniformity. They took the path of least resistance, promising that they would get to uniformity after avoiding NARAB. Eleven years later, licensure problems are still a beast. No significant progress on uniformity has occurred.
Fortunately, we are not defenseless. The conflict between state legislators and regulators might mean nothing will get done, which would not be the worst alternative (thus, home-state rules and taxes only). The congressional authors of the NRRA have already fired a warning shot. Also, the incoming chairmen of the House Financial Services Committee and Senate Banking Committee, respectively, Spencer Bachus of Alabama and Tim Johnson of South Dakota, were big and open backers of NRRA. Neither is a shrinking violet on the need for better insurance regulation. After all the work that went into making the NRRA a reality, congressional leaders are unlikely to shrug and walk away from poor implementation of the law.